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ECN 112
PRINCIPLES OF MICROECONOMICS
CHAPTER 6 PRACTICE PROBLEMS
This is NOT a homework assignment.
It is just practice to help you become familiar with the Chapter 6 material.
There is no homework for Chapter 6, but this material will be on Midterm I.
1.
(a) Suppose that when the price of bagels rises by 10 percent, the demand for
cream cheese falls by 3 percent at the current price. Calculate the cross price
elasticity of demand for cream cheese with respect to the price of bagels. Also,
be sure to tell me whether bagels and cream cheese are substitutes or
complements.
(b) Suppose that when income rises by 10 percent, the demand for bagels
increases by 1 percent at the current price. Calculate the income elasticity of
demand. Also, be sure to tell me whether bagels are normal goods or inferior
goods.
2.
If a 10 percent increase in the price of Cheerios causes a 25 percent reduction in
the number of boxes of Cheerios demanded, calculate the price elasticity of
demand for Cheerios. Also, be sure to tell me whether demand is elastic or
inelastic.
3.
If an increase of 10 percent in the price of frozen pizzas results in a 9 percent
increase in the quantity of pizzas supplied, calculate the price elasticity of supply
for frozen pizzas. Also, be sure to tell me whether supply is elastic or inelastic.
4.
The price elasticity of demand for crude oil in the United States has been
estimated to be -0.06 in the short-run and -0.45 in the long-run. Explain why the
demand for crude oil is more price elastic in the long-run than in the short-run.
5.
According to a study by the U.S. Centers for Disease Control and Prevention, the
price elasticity of demand for cigarettes is approximately -0.25. Americans
purchase about 360 billion cigarettes each year.
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(a) Suppose we impose a federal tax on cigarettes that causes a 50 percent
increase in the price of cigarettes. Given the information above, calculate the
effect on the quantity of cigarettes demanded. (Hint: for this problem, you want
to rearrange your equation for price elasticity of demand so that %∆QD is on the
right-hand side.)
(b) If you are a policymaker, is raising the tax on cigarettes more effective at
reducing smoking when demand for cigarettes is elastic or if it is inelastic?
Explain.
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